Euro Undeterred by Italian Political Dramas

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By Chris Gore | December 11, 2012 9:53 AM EST

GoMarkets

Euro undeterred by Italian political dramas

Global markets mulled mixed news from the Euro region overnight, with Italy back in the fray after Prime Minister Mario Monti announced his intention to resign after the 2013 budget is passed. At the centre of the latest political uncertainty is former Prime Minister Silvio Berlusconi, who has announced he will "reluctantly" run for office at the next election. Berlusconi is currently appealing a 4-year prison sentence handed down in October for tax fraud while continuing to fight unlawful relations charges in court, stemming from the much publicised 'bunga bunga' saga. While political pundits suggest Berlusconi is unlikely to garner enough support to win, he's political clout may still be enough to create considerable headwinds for the smooth formation of a new Government.  Political uncertainty in the region has manifested negatively for Italian debt markets, with debt yields rising across the curve with the 10-year benchmark rising to multi-month highs of 4.88 percent.

Meanwhile, Greece remains in the headlines with their debt buy-back extended for two days as they strive to meet their 30-billion euro target needed to satisfy IMF demands.

Despite ongoing uncertainty, support for the Euro remained in play, albeit only just. It was enough however to squeeze back above the $US1.29 region after starting the week on the back foot below the figure. At the time of writing the Euro is buying $US1.2945.

Across the Atlantic, risk trends reflected more of a neutral tone with US equity finishing mostly flat on the day. The US dollar was moderately weaker against major counterparts with the CAD and Kiwi leading a move higher.  While the Kiwi continued to outperform its commodity rivals, there was little impetus to force a stronger break to the upside of resistance at 82.50/55 US cents.

AUD resilient but capped below 105 US cents

The Aussie dollar remained capped below the psychological milestone of 105 US cents, with price action easing lower in the latter half of US trade after earlier rising to highs of 105.06 US cents. Nevertheless, the theme of resilience remains in play for the local unit with yesterday's less-than-encouraging Chinese trade data failing to negate the earlier, robust data from the region.

Chinese exports rose 2.9 percent in November, well below consensus estimates of 9 percent growth, while import activity was flat over the same period after a 2.4 rise in October.  China's overall trade surplus fell to $19.63 billion from a previous 31.99 billion. While benign export activity is considered a product of global headwinds, the flat imports print is a particularly negative indicator of domestic demand. Nevertheless, it would seem the trade data was superseded by the weekend's releases which showed stronger than expected factory output and retail activity, amid only a slight pick-up in overall inflation growth. The National Bureau of Statistics data showed consumer prices rose to a yearly pace of 2-percent in November from a previous 33-month low of 1.7 percent. Retail sales increased 14.9 percent on year, from 14.5 percent rise in October while industrial production grew 10.1 percent in November from a previous 9.6 percent. Moderate inflation growth amid stronger retail and factory activity is considered an optimum scenario for overall growth in the region, suggesting Beijing is striking the delicate balance between inflation and economic growth.

Locally, the release of the NAB business confidence data at 11.30 AEDT will be the next mid-tier directive for the Aussie dollar, and anticipate this alongside regional equity performance will influence the Aussie's appeal in domestic trade. At the time of writing the Australian dollar is buying 104.85 US cents.

Greenback at critical juncture, FOMC eyed

We consider the next critical test for the greenback -  and by default its major counterparts - to be Wednesday's FOMC policy decision, where its expected Bernanke and Company will vote in favour of further outright monetary easing to replace 'operation twist'. With the Fed running low of short-term securities needed to maintain operation twist, markets will be watching for any new asset purchase plans and many believe a case is strong for the Fed to establish new out-right easing initiatives in the form of quantitative easing, in addition to the current US$40 billion in purchases conducted per month.  "A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program," according to November meeting minutes. Although markets - to a degree - have priced in further Fed easing, the greenbacks innate aversion to outright stimulus or quantitative easing should remain the dominate factor in its overall performance. The degree of movement will of course depend on the size and scale of any new Fed stimulus.

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